Capital Budget Implementation Raises Concerns on Inflation


Kunle  Aderinokun

As disbursements for  the capital projects would begin in earnest following the signing of the  2017 budget  into law by Acting President Yemi Osinbajo, concerns have been raised on the impact of increased liquidity  in the economy on declining inflationary trend. The ability of the Central Bank of Nigeria to manage excess liquidity arising from capital budget implementation has, however, been acknowledged.  

The National Bureau of Statistics, which recently released   report on the Consumer Price Index  for May 2017, disclosed that the index,  which gauges inflation increased by 16.25 per cent (year-on-year) in May 2017, representing 0.99 percent points lower  than 17.24 per cent in April. The  decline is the fourth  since January 2017.

NBS also revealed that, on a month-on-month basis, the headline index increased by 1.88 percent in May 2017, 0.28 percent points higher than the rate of 1.60 percent recorded in April 2017,  indicating persistence pressure on prices despite the general decline in year-on-year inflation. Month on Month inflation has cumulatively risen by 7.7 per cent since January 2017

Food Inflation increased by 19.27 per cent (year-on-year) in May 2017, down by 0.03 percent points from the rate recorded in April of 19.30 per cent. But on a month-on-month basis, the food sub-index increased by 2.54 percent in May, up by 0.50 percent points from 2.04 per cent recorded in April.  

According to NBS, “The Food index in May whether on a year on year basis on month on month basis therefore indicates sustained pressure on food prices since then beginning of the year following high food prices recorded the whole of 2016.”

While analysts attributed the improvement in macroeconomic indices to the decline in CPI year-on-year, liquidity surge into the economy, which is still volatile could adversely affect the inflationary trend, if not well  managed. But the CBN armed with its instruments of controlling excess liquidity has been deemed capable to rise to the occasion.

According to analysts at Eczellon Capital Ltd, “The execution of capital projects in the 2017 budget will increase the level of liquidity in the economy and this may lead to an increase in inflation rate. Conversely, excess liquidity in the economy may be mopped by judicious application of monetary policies.”

The analysts  argued that, “The war against inflation rate has not been fully won as inflation rate may increase due to excess liquidity bolster by the execution of capital projects in the just released 2017 budget. The CPI is still very high at 16.25 per cent, thus, inflation rate has not been fully tamed.”  But  they acknowledged that the CBN had been able to reduce the increase in inflation rate.

The analysts  pointed out  that the  decline in the CPI could be related to “the base rate which has priced in an already volatile economy, hence the improvement in some macroeconomic indicators has helped to reduce the CPI.”

They enthused that, “The drop in the CPI will boost the purchasing power of the local currency as the prices of goods and service decline. Hence, the value of naira will gradually rebound as more economic activities unfold. Also, the decrease in the CPI will resuscitate confidence in the economy as purchases of goods and services bounced back at lower rates.”

In his view, Director, Union Capital Ltd, Egie Akpata,  noted that, “There is a risk that the recently passed budget and its expansionary focus could drive up inflation. However, the ability of the Federal Government to fund the deficit and the CBN strategies in the second half of the year will be instrumental in keeping inflation on a downward trend. 

Nevertheless, Akpata  posited that, “The big drop in CPI is welcome but not unexpected,”, stating, however, that  the increase in month-on-month inflation continued to give cause for concern.

Pointing out that the figures in the CPI report suggested that the CBN policies were pushing inflation down, Akpata, contended that,  “The CBN is not likely to reduce interest rates on the near term as cost pressures as shown in the month-on-month increase are not moving in the right direction.”

Similarly, CEO, Global Analytics Consulting Ltd, Tope Fasua, pointed out that the recent release of the budget will lead to more liquidity and a further increase in inflation – “if we follow the theory.”

Fasua therefore believed,  “We have to be more circumspect to discombobulate the drivers of inflation in Nigeria. A lot of the inflation is driven by perception and expectations, rather than a calculated response to economic situations. I have had to note elsewhere that food vendors are getting smarter than before and getting their own back from a perceived ‘opulent’ society.”

The economist, however, argued that, the role of taming inflation, though chiefly that of the CBN, had to now be viewed from a multi-sectoral, multi-stakeholder perspective.

According to him, “Monetary policies have their own shortcomings, and in a country such as ours where data is suspect, the reliance on monetary policies alone to achieve these objectives is inefficient.  Regarding the recently released data, it is noteworthy that food inflation is still on the rise, and this is where it pinches the common man the most. Whose role is it to ensure that food prices don’t continue to increase? Certainly not a matter for only the CBN because if it is we are only further promoting extra-monetary interventions of which we have a surfeit for now. It is also dangerous to leave all the levers of an economy to a single agency which already has intervention funds for Agric, Aviation, Manufacturing, SMEs and the rest.”

To the CEO, The CFG Advisory Ltd, Adetilewa Adebajo,the development did not come as a surprise as the economy’s exchange rate had  been relatively stable at N305/$ with forex supply  on the increase and high interest rates maintained at 14 per cent.  “We hope that the downward trajectory continues at faster pace. Falling inflationary pressures is indicative of the possibility that interest rates could be revised at the next MPC meeting which will the n help to stimulate economic growth,” he added.

Professing strong belief in CBN’s strategies for tackling inflation, Adebajo stated: “There is a greater level of certainty regarding the CBN’s approach towards taming inflation as year-on-year inflation has fallen for the five consecutive months from 18.72 per cent (Jan) to 16.25 per cent(May) by 2.47 percent points.”

“ The decline by almost a 100 basis points from April to May CPI figures can help restore confidence in the naira. We can strongly say CBN’s efforts to tackle inflation are finally reaping some benefits,” he posited.


Forex Market

 The Central Bank of Nigeria on Monday intervened yet again in the inter-bank foreign exchange market to the tune of $413.5 million to further shore up the international value of the naira. The latest intervention underscored the apex bank’s resolve to sustain liquidity in the foreign exchange market. “The CBN offered the sum of 100 million dollars to dealers in the wholesale window, while the Small and Medium Enterprises window was allocated a total of 28 million dollars. The invisibles segment was allocated the sum of 25.5 million dollars to meet the needs of those requiring forex for business and personal travel allowances, school tuition, medicals, etc.,” the apex bank explained.



Nigeria generated N204.77 billion as Value Added Tax in the first quarter of 2017.  The National Bureau of Statistics said this in a Sectoral Distribution of VAT Data for first quarter of 2017. The report showed that the N204.77 billion generated in the quarter was lower than N207.35 billion generated in the fourth quarter of 2016. The decline in the amount generated represented 1.25 per cent decrease quarter-on-quarter. The manufacturing sector generated the highest amount of VAT with N28.73 billion.



 The Federal Airports Authority of Nigeria conducted a test-run on an upgraded baggage scanner machine that can detect explosives, narcotics and other prohibited items at the Murtala Mohammed International Airport, Lagos. A statement by Henrietta Yakubu, the agency’s spokesperson, said the initiative was put in place to boost safety and security programmes around the country’s airports. FAAN also explained that the scanner was intended to complement the Executive Order recently issued by the acting president, Professor Yemi Osinbajo.


Tax Evasion

 Nigeria ratified multilateral conventions on tax-related treaties to end profit shifting and tax evasion by multinational companies. The ratification of the treaties followed the approval of a memo submitted by the Minister of Finance, Kemi Adeosun, in an effort to widen the country’s tax base and improve revenue generation. Adeosun said the ratified conventions would enable Nigeria evaluate, amend and cancel existing treaties that were not beneficial to the country. Signing of the convention would also curtail illicit financial flows from and into the country.



 The Consumer Price Index, which measures inflation, dropped from 17.24 per cent in April to 16.25 per cent year-on-year in May, according to the National Bureau of Statistics. The NBS in the report stated  that on a month-on-month basis, the headline index rose by 1.88 per cent in May, representing 0.28 per cent points higher than the rate of 1.60 per cent recorded in April.